At a Harvard panel discussion yesterday, economist professor Ken Rogoff made an interesting point: The liquidity crisis isn't real. Or, to restate it: Any liquidity crisis is caused by the promise of a government bailout. Ken said that his many friends in investment banking said that there is plenty of money to invest in financial services, but right now it is "sitting on the sidelines." Why? Because the financial services industry does not want to pay the terms required to get that money back in circulation (e.g., give up equity). As he put it, why do business with Warren Buffett who will negotiate a tough deal, if you believe that the government will ride in soon with cheaper cash?

[Edit: The comments to that entry say it was actually Greg Mankiw, and claims that Elizabeth Warren took it out of context, now I really wanna see the video]

To me it seems like... well... a parable:

We live in a neighborhood. Maybe not the best neighborhood in the world, but it ain't bad, and people from other neighborhoods are clamoring to live here, so we're kinda happy here. Some folks starts to build a high rise in our neighborhood. At first we're a little concerned, 'cause we do occasionally have natural disasters here, but the promises of how modern buildings are going to turn our little neighborhood into a very desirable city in a few years keep us from protesting too loudly. Yeah, the engineering looks a little shakey, in fact one of the guys working on this building even refers to the idea that it can be built as high as is planned as "irrational exhuberance", but construction continues.

It seems like this building has hit a reasonable height, but down the street a used car dealer comes in and says "hey, you can use scrap steel from my used car business to build that thing even higher!". Many of our neighbors say "great, I'm gonna get a condo in that building". Soon, some of us who were uneasy with the building in the first place start to notice that a disproportionate number of people seem to be dying in crashes of cars bought from the used car lot, so we start to look closer at the building. And now we notice that if the building falls over, it's gonna wreck a good bit of our neighborhood, crush our houses and shrubberies.

And we start saying something.

Now the guys building this building and the guy with the used car lot catch on to this and say "Woah! This building's on shakey ground! We need everyone in the neighborhood over here, quick, to hold this building up! We need to buy lots of support to keep this building from collapsing all over the neighborhood!"

And those who have had second thoughts about this building are starting to say "well, why don't we take a couple stories off the top, rather than just putting temporary reinforcements around the bottom?" Of course our neighbors who bought condos in this building are hollering at us that if we take stories off the top, they'll lose their condos, so they're siding with the used car guy.

No matter what, you don't take the first deal you're offered by the used car guy. And, indeed, collapse may be imminent, but it seems like double-checking the engineering of the people who brought us the unstable mess is in order before we start slapping 2x4s on the first story of this skyscraper to figure out how to really keep this thing from falling over, or at least to figure out how to take off a few of those unsustainable stories safely.

Oh, and if I hear one more person blaming tranches and bad rating systems on the 30 year old legislation that is the CRA, I'm gonna have to lay about with me with a clue stick. I'm not necessarily a fan of the CRA, but the arguments I've seen blaming all the sub-prime lending by non-CRA conforming organizations on the CRA are beyond absurd.

Oh, and if I hear one more person blaming tronches and bad rating systems on the 30 year old legislation that is the CRA, I'm gonna have to lay about with me with a clue stick. I'm not necessarily a fan of the CRA, but the arguments I've seen blaming all the sub-prime lending by non-CRA conforming organizations on the CRA are beyond absurd.

Your argument here seems to drift. Care to clarify? All banks have the Community Reinvestment Act poster in the lobby. They were required to loan in bad areas and to less qualified people so that home ownership is increased. This in addition to the fed pumping too much money out caused the problem. The government is the problem and now they try to fix it by printing even more money. This will delay any solution and cause it to really pop when we finally have to stop the insanity.

Whats ahead? Currency reissue in New Dollars? Required sharing of our homes with others because they deserve to have a nice home too? Rationing of food? They already stopped Ron Paul dollars because it was gold and silver based. Stay tuned for currency controls.

I absolutely adore Elizabeth Warren's explanation of what happened. It's clear, concise, and seemingly accurate from my knowledge. Wonderful video in plain english, I actually plan on distributing this to a few friends who are confused about what has happened and is happening with the bailout.

You don't have to "Stay tuned for currency controls." -- they are already being tightened.

So far it is for expatriates who give up their passports, and those who yield their green cards. It is a tax on the gain of their worldwide holdings under the so called "Heroes Earning Assistance and Relief Tax" (HEART) Act. The Act went into effect 18Jun08. With hokey names like these, there is always a bomb in the middle ready to explode upon the unsuspecting.

And to think they can go after you for attempting to get out of the sanatorium? Meanwhile, the Haliburtonites and Blackwater slime avoid paying any tax and live in Dubai legally off our backs? This is sounding more and more like living in America, circa 1770.

Which state will be the first to attempt legally to succeede from the Union? Maybe Vermont?

Ziffle, I'm having trouble finding specific numbers, but, among many other lenders, none of Countrywide's loans weren't made under the CRA, and even for those loans that were covered under the CRA, there wouldn't have been nearly the investment in them if they hadn't been tranched into derivatives to appear to be far more profitable (because the rating and return models weren't accurate on the tranched data).

Yes, the fact that banks could so easily sell the CRA loans made those CRA loans much more attractive to the banks selling them, but who wouldn't, given that a broker could make a heck of a lot more money selling the sub-primes to the derivative makers than selling primes?

Any clue why Ron Paul tried to correct him and say "coins" when he used the term "coin currency"? Is RP not familiar with the term "coin currency" or does it seem a confusion between the terms with him? "Coining currency" is printing currency, not necessarily just coins.